Question: Two projects have the following cash flows. Project B allows the firm to abandon the project with a salvage value of $200 in year 2

 Two projects have the following cash flows. Project B allows the

Two projects have the following cash flows. Project B allows the firm to abandon the project with a salvage value of $200 in year 2 if the economy is poor (50% chance). Assume r = 20%. The following table shows the original forecasted cash flows on the "decision tree". Project A (no embedded options): Year 0 Year 1 $400 $200 Year 2 $600 -$100 Future Outcome Good Bad A: - $300 Project B (with an abandonment option in the second year): B: $300 $300 $150 $500 -$100 Good Bad What is the value of the option to abandon? $69.4 $95.8 $26.4 None of the others is correct

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